The flow of goods and services in a market economy
FLOW OF GOODS AND SERVICES IN THE ECONOMYAN OPEN ECONOMY
B2 B1
FINANCIAL MARKETS
A2 A1
FIRMS HOUSEHOLDS
FA CTOR MARKET
PRODUCT MARKET
D S
DS
P
Q
P
Q
S
T
IM
G
I
FINANCI
X
I
S
S
D S
Product Market
Factors Market
CONSUMERSPRODUCERS
P
Q
P
Q
T
D
IM
GX
I
The playersThe players
THE ECONOMY CAN BE DIVIDED BETWEEN CONSUMERS AND PRODUCERS
1. CONSUMERS OR HOUSEHOLDS
•THIS IS THE SECTOR OF THE ECONOMY THAT PURCHASES FINISHED GOODS AND SERVICES AND PROVIDE FACTORS OF PRODUCTION TO THE ECONOMY
2. PRODUCERS OR FIRMS
•THIS IS THE SECTOR OF THE ECONOMY THAT PROVIDES FINISHED GOODS AND SERVICES AND PURCHASES FACTORS OF PRODUCTION TO THE ECONOMY
CONSUMERSPRODUCERS
The marketsIN CANADA FOR THE MOST PART THE MARKET PLACE DETERMINES THE PRICE AND THE QUANTITY OF GOODS AND SERVICES PRODUCED…
AS WELL AS THE PRICE AND QUANTITY OF FACTORS OF PRODUCTION
THE FREE INTERACTION BETWEEN THE SECTOR OF THE ECONOMY THAT DEMANDS AND THE SECTOR OF THE ECONOMY THAT SUPPLIES CREATES MARKET PRICES THAT SATISFIES BOTH DEMAND AND SUPPLY
THERE ARE TWO MARKETS:
THE MARKET FOR THE FACTORS OF PRODUCTION AN DTHE MARKET FOR GOODS AND SERVICES
S
D S
Product Market
Factors Market
CONSUMERSPRODUCERS
P
Q
P
Q
D
The flows
S
D S
Product Market
Factors Market
CONSUMERSPRODUCERS
P
Q
P
Q
DB1B2
A2A1
A1 and A2 flows are called GDP Expenditures based flows
Consumers demand and purchase final goods and services from Producers on an open market. Their expenditures.
They provide money and receive final goods The amount of goods and services that they can
purchase creates their standard of living Producers supply and sell final goods and
services to Consumers on an open market. They receive money and provide goods and
services The money they receive becomes their revenues
S
D S
Product Market
Factors Market
CONSUMERSPRODUCERS
P
Q
P
Q
DB1B2
A2A1
B1 and B2 flows are called GDP Income based flows Firms (Producers) demand and purchase Factors of
Production goods and services from Households.(land, labour, capital, entre.)
They provide money and receive the factors of production needed to produce goods & services
The amount and the price of factors of production will determine the final price of the item and the number of items produced
Households (Consumers ) supply and sell the factors of production needed to produce items.
They receive money in return, which becomes their income.
The leakages
THERE ARE THREE CATEGORIES OF LEAKAGES
IMPORTS: MONEY THAT GOES OUT OF THE ECONOMY AND INTO THE ECONOMY OF ANOTHER COUNTRY
SAVINGS: MONEY FROM INCOME THAT IS NOT SPENT BUT SAVED FOR FUTURE SPENDING
TAXES: MONEY FROM INCOME THAT IS TAKEN AWAY BY THE GOVERNMENT TO BE USED HOWEVER THEY SEE FIT
S
S
D S
Product Market
Factors Market
CONSUMERSPRODUCERS
P
Q
P
Q
T
D
IM
IMPORTS: MONEY THAT GOES OUT
OF THE ECONOMY AND INTO
THE ECONOMY OF ANOTHER COUNTRY
SAVINGS: MONEY FROM INCOME THAT IS NOT SPENT BUT SAVED FOR FUTURE SPENDING
TAXES: MONEY FROM INCOME THAT IS
TAKEN AWAY BY THE GOVERNMENT
TO BE USED HOWEVER THEY SEE FIT
The injections
THERE ARE THREE CATEGORIES OF INJECTIONS
GOVERNMENT SPENDING: GOVERNMENT EXPENDITURES, MONEY PUT BACK INTO THE ECONOMY (MOST OF IT COMES FROM TAXES)
EXPORTS: MONEY PUT INTO THE CANADIAN ECONOMY BY FOREIGN CONSUMERS
INVESTMENTS: MONEY PUT INTO THE ECONOMY BY THE BUSINESS COMMUNITY (MOST OF IT COMES FROM CONSUMER SAVINGS)
S
D S
Product Market
Factors Market
CONSUMERSPRODUCERS
P
Q
P
Q
D
GX
I
GOVERNMENT SPENDING: GOVERNMENT
EXPENDITURES, MONEY PUT BACK INTO
THE ECONOMY (MOST OF IT COMES
FROM TAXES)
EXPORTS: MONEY PUT INTO THE
CANADIAN ECONOMY BY FOREIGN
CONSUMERS
INVESTMENTS: MONEY PUT INTO THE
ECONOMY BY THE BUSINESS
COMMUNITY (MOST OF IT COMES
FROM CONSUMER SAVINGS)
The whole model
S
S
D S
Product Market
Factors Market
CONSUMERSPRODUCERS
P
Q
P
Q
T
D
IM
GX
I
The REAL flows and NOMINAL flows
THE REAL FLOW:
THIS IS THE ACTUAL FLOW OF GOODS AND SERVICES THROUGHOUT THE ECONOMY
EXAMPLE: 1 MILLION CARS
100 HOURS OF ACCOUNTING SERVICES
2 TONS OF IRON ORE
The REAL flows and NOMINAL flows
THE REAL FLOW:
SINCE THESE ARE THE ACTUAL GOODS AND SERVICES THEY OFFER A MORE ACCURATE COUNT OF THE PRODUCTION OF THE ECONOMY
S
D S
Product Market
Factors Market
CONSUMERSPRODUCERS
P
Q
P
Q
D
The REAL flows and NOMINAL flowsTHE NOMINAL FLOW:
THIS IS THE DOLLAR VALUE FLOW OF GOODS AND SERVICES THROUGHOUT THE ECONOMY
EXAMPLE: THE $ VALUE OF 1 CAR PURCHASED = $20000
1 HOURS OF ACCOUNTING SERVICES=$100
2 TONS OF IRON ORE=$1000
The REAL flows and NOMINAL flows
THE NOMINAL FLOW:
SINCE THE MONEY FLOWS DEAL WITH PRICES IT MAY DISTORT THE ACTUAL PRODUCTION OF THE ECONOMY. IT INCLUDES INFLATION
S
D S
Product Market
Factors Market
CONSUMERSPRODUCERS
P
Q
P
Q
D
The INCOME sector and the EXPENDITURES sector
The two sided economy within this model
EVERY PRODUCT THAT IS MADE IN AN ECONOMY CAN BE SEEN IN TWO WAYS FOR THE INCOME INCLUDED IN IT OR FOR THE PRICE IT IS BEING SOLD AT
The two sided economy within this model
EXAMPLE: A loaf of bread THAT SELLS FOR $1
IN THAT ONE DOLLAR LOAF, THERE ARE 4 CATEGORIES OF INCOME
WAGES AND SALARIES = $.60 , RENT = $ .15 , INTEREST= $ .20, PROFIT=$ .05
THEREFORE 60+15+20+5=$1 WHICH IS ALL THE INCOME INCLUDED IN IT
The two sided economy within this model
OR THE EXPENDITURE EXTENDED TO PURCHASE THAT LOAF WHICH IS $1
THE TWO SIDES ALWAYS EQUAL:
INCOME 60+15+20+5 = EXPENDITURES $1
S
D S
Product Market
Factors Market
CONSUMERSPRODUCERS
P
Q
P
Q
D
INCOME
EXPENDITURES
Economic growth within this modelLeakages take money out of the economy while injections put money into the economy.For economic growth the economy needs more injections than leakages
Economic growth within this model
Yearly government budgets:a. if G >T = deficit which is good for the short term economy b. if G<T = surplus which is bad for the short term economyc. if G=T= balanced budget which is neutral for the economy
Economic growth within this model
Yearly trade balance: X - IM = surplus, a. if X >IM = surplus which is good for the short term economy b. if X<IM = deficit which is bad for the short term economyc. if X=IM= balanced budget which is neutral for the economy
Economic growth within this model
Investments and savings: a. if I >S = net injections which is good for the short term economy b. if I<S = net leakages which is bad for the short term economyc. if I=S= no change which is neutral for the economy
Economic growth within this model …mathematical examplesC=consumer expendituresStarting economy: Y1 = C + LeakagesEnding economy: Y2 = C + InjectionsYearly Economic change = Y2 - Y1Yearly % Economic change = change / Y1 Example: C=300, G=20, I=30, IM=25, T=15, X=35, S=10
Economic growth within this model …mathematical examples•What income did the country start with?•What income did the country end with?•What was the change?•What was the % change?What was the government budget?
What was the trade balance?
What was the investment savings balance?
Economic growth within this model …mathematical examples
•What income did the country start with? 350•What income did the country end with? 385•What was the change? 35•What was the % change? 10%•What was the government budget? T-G = 15-20= 5 deficit…good for economy
•What was the trade balance? X-IM=35-25=10 surplus…good for the economy
•What was the investment savings balance? I-S=30-10=20 surplus … good for the economy
S
S
D S
Product Market
Factors Market
CONSUMERSPRODUCERS
P
Q
P
Q
T
D
IM
GX
I
Economic growth within this model …mathematical examples
PROBLEM 1
Example: C=500, G=40, I=20, IM=35, T=45, X=25, S=30
Economic growth within this model …mathematical examples
•What income did the country start with?•What income did the country end with?•What was the change?•What was the % change?What was the government budget?
What was the trade balance?
What was the investment savings balance?
Example: C=500, G=40, I=20, IM=35, T=45, X=25, S=30